What does Glencore bring to the JSE?

[miningmx.com] – IT pays to know Ivan Glasenberg; it pays even if you don’t know him.

Just ask the 3,600 fellow inhabitants of Rushchlikon, a village near Lake Zurich where Glasenberg lives. When the former Johannesburger listed Glencore on the London Stock Exchange, he paid so much personal tax that the village allowed its members a 7% tax cut.

A year earlier, Switzerland granted Glasenberg citizenship and a passport that he pockets along with those to South Africa, Israel and Australia – national allegiences that are really more commercial footprints.

Glasenberg is a citizen of a globally traded commodities empire now called GlencoreXstrata of which he is CEO. Zinc in Kazakhstan to nickel in Quebec, it’s all part of a game of risk Glasenberg expertly manages.

Once described as the biggest company you’d never heard of, GlencoreXstrata is now very public. After nine years spent growing Glencore from its headquarters in the canton of Zug, Glasenberg listed it in 2012 and a year later merged it with Xstrata. At $38bn, it was one of the largest deals of the year.

So it’s not surprising the proposed secondary listing of GlencoreXstrata on the Johannesburg Stock Exchange, expected by the fourth quarter according to a company statement on September 10, has been met with excitement in South Africa – and not only because it provides the country’s beleaguered mining investors with a break from the tedium of negative newsflow.

“It does mean a lot,’ says Zeona Jacobs, director for issuer and investor relations at the JSE. Anglo American generates 5.5% of trade by value on the bourse so there’s some expectation that GlencoreXstrata, which at a market capitisation of R667bn is double the size of Anglo American, will have a significant impact.

“A company of this size and magnitude means a lot in terms of trading. We’re very excited,’ says Jacobs.


So what will investors be getting when GlencoreXstrata takes its place on the JSE? In a word: variety.

“South African fund managers are relatively limited in what they can buy,’ said Michael Kavanagh, an analyst for Noah Capital. “You normally end up playing Anglo against BHP Billiton at different times, but GlencoreXstrata is a completely different animal to either of those companies,’ he said.

It is certainly more diversified. In the estimation of David Pleming, investment manager at the privately-owned Tantalum Capital, Glasenberg’s company differs from the other major mining groups in that it doesn’t have any exposure to iron ore production, the price of which is forecast to fall.

“The platinum asset is non-core; it doesn’t have a trading abilty so we don’t think we’re giving up a big advantage”

Based on the first half of the current financial year, 89% of Rio Tinto’s pre-tax earnings was derived from iron ore; BHP Billiton had 52% exposure to iron ore, while Anglo American derived 48% of pre-tax earnings from the steel ingredient.

In contrast, GlencoreXstrata has smaller exposure to more commodities such as oil sector, coal (14% of pretax earnings), nickel (3%), and zinc (13%). Its biggest exposure by commodity is to copper which comprised 30% of pretax earnings. The crucial difference about GlencoreXstrata, however, is that it trades all of the above.

Speaking at an investor day earlier this week, Glasenberg said his company wouldn’t invest in minerals that it couldn’t push through its infamously aggressive marketing division, a collection of traders described somewhat apochryphally one suspects as cut-throat.

They sell minerals, but they also deal in the agriculture sector trading grain, wheat, soya as well as cotton. Marketing agricultural products may have provided only 1% of pretax earnings, but metals and energy trading comprised 38% of pretax earnings – the single largest contributor.

The trading division requires a lot of working capital – as marketers will not hesitate to stockpile minerals at the mine when prices are poor, hence the often jabbing accusation that GlencoreXstrata “controls’ the markets.

It doesn’t require heaps of capital expenditure to run a trading business like this which means there’s less capacity for misuse of capital in long-lead projects for which the world’s mining industry has been heavily criticised by shareholders lately.

Whereas mining companies mine, GlencoreXstrata mines in order to market. That’s why the liquidiation of GlencoreXstrata’s 25% stake in platinum producer, Lonmin, is just a matter of time.

Said Glasenberg: “We don’t want to hold an asset where we don’t trade the commodity. We need to take advantage of our trading base. The platinum asset is non-core; it doesn’t have a trading abilty so we don’t think we’re giving up a big advantage. But we won’t rush it [the sale of Lonmin]. We will review it as time goes on.’

The downside to a business like GlencoreXstata, however, is that it’s difficult to keep track of the working capital given the dynamic nature of the business.

For one UK analyst, who asked not to be named, it means the company’s books can be opaque. “I’ve spent hours trying to track down $25bn to $30bn of working capital, which is a fair old number.

“You don’t always know where the cash is: stockpiled on a mine, with a customer, or on a boat. And when you’re trying to work out net debt, you have to deal with the fact that GlencoreXstrata adds back cash from so-called quickly realisable capital,’ he says.

The company has improved its transparency, but it will always be opaque, both in its trading and in the way it assesses new avenues for investment. In fact, Glasenberg openly admits the company to being “opportunistic’, taking risks where others hesitate.

In 2012, Global Witness demanded Glencore explain “. potentially corrupt deals in the Democratic Republic of Congo’ (DRC). This was a reference to Glencore buying shares in copper mines owned by Dan Gertler, the Israeli businessman who is alleged to have bought assets through DRC president Joseph Kabila at enormous discounts.

Glencore and Gertler have questioned Global Witnesses claims, and challenged the valuations it placed on the copper assets reputed to be involved.


Mike Teke, deputy president of the Chamber of Mines of SA, knows a thing or two about GlencoreXstrata’s opportunism having had his Optimum Coal circled and consumed by the Swiss group in 2012 for about R10bn. “They are very entrepreneurial with good energy. I think listing here is a stamp of approval for the country,’ said Teke.

Nobody believes GlencoreXstrata’s listing here is just that, however; certainly not Teke who declined to comment much on the group’s trading style, restricting his views to having found his experience of Glencore as “pleasant’.

In its official comment, GlencoreXstrata said listing in Johannesburg was motivated by the fact that Africa was an important and growing market for the group, and South Africa has a strong institutional base. But As his collection of passports would indicate, Glasenberg’s interest in Johannesburg is strictly business, not a homecoming.

“South Africa is a captive market. It offers South African investors an opportunity to invest capital in a company that would normally be trapped in the country,’ said Marc Elliott, an analyst for Investec Securities in London.

Roughly a third of GlencoreXstrata’s 20 assets globally are located in Africa including dominance in the coal and coal exporting market in South Africa. It is also the majority shareholder of a joint venture with Merafe Resources.

The Johannesburg firm’s CEO, Zanele Matlala, comments that GlencoreXstrata is driven solely by margin. “I don’t think they look at things from a size point of view,’ she says, adding that the merger with Xstrata, Merafe’s original partner, was unlikely to mean changes despite comments from Glasenberg earlier this week that the group would continue with “a comprehensive review of assets’.

“South Africa is a captive market. It offers South African investors an opportunity to invest capital in a company that would normally be trapped in the country”

“They like to be in ferrochrome because they can trade it. You really only get on GlencoreXstrata’s radar if you’re not profitable,’ she said.

Profitability, and more importantly, return on capital employed (ROCE), has not been a feature of mining companies have brought to investors, even through the mining boom. It has led to significant liquidations of mining shares by investors and resulted in the spate of CEO resignations, principally on the back of having paid for assets that couldn’t provide a real return.

Glasenberg says GlencoreXstrata is only likely to invest in brownfields projects where capital required is much lower than building new greenfields projects.

“Executives have been trying to understand supply and demand rather than just pushing metals in the market. Shareholders are also talking,’ he said. “I think this is a big new change.’

Glasenberg said the mining sector had to be “vigilant’ about repeating the excesses of the mining boom, expanding production in an inexorable pursuit of growth over value. “If we do see commodity prices increasing, we should not get carried away and over-supply the market,’ he said.

“We are shareholders in Glencore so our capital allocation is very vigorous. It’s our money like it’s your money,’ he added. That’s once crucial difference in GlencoreXstrata compared to its peer group. Senior management holds about 25% of GlencoreXstrata shares whereas in BHP Billiton, Rio Tinto and Freeport, a North American company, senior management holds on average 0.03% of the stock; 1.02% in the case of Anglo American.

“There is no bureaucracy, no emphasis on titles. We own the money,’ Glasenberg says. “It must be simple, and it must be swift,’ he says of headquarter decision-making.

Xstrata was not one of the industry’s most bureaucratic companies. The way its CEO Davis saw it, Xstrata’s head office was slight with asset control devolved to the business units, a structure Davis felt made the company nimble. Glasenberg, however, was still able to strip out up to $2bn in costs following the “merger’ with Xstrata, some four times more than originally forecast.

“A significant portion of the synergies are in overhead costs at head and regional offices,’ he said. “We are only just starting to look at the combined mining and metallurgical operations.’

Of the $2bn in synergy-related savings, the bulk ($1.4bn) would come from direct cost savings while the balance would be made up from $450m in marketing synergies, as already forecast, and $175m from financing synergies.

There are, of course, the cynics about GlencoreXstrata’s impending debut in Johannesburg.

“You want the cynical view?’ asked an UK analyst who follows the progress of GlencoreXstrata. “There are going to be a lot of shares sold by management in the years to come, and they need a market for those shares.

“It’s our money like it’s your money’

“In London, there are options: Antofagasta, Randgold Resources; in Johannesburg, everyone is going to have shares in the company, especially if you’re a tracker fund (obliged to invest in the biggest companies),’ the analyst said.

The other view is that GlencoreXstrata is positioning itself for another tilt at Anglo American, notwithstanding the anti-trust issues that might be thrown in the way of such an acquisition.

From a political perspective, buying Anglo American when you’re already listed in Johannesburg does not seem to be “exporting’ the company at all so much as augmenting it, GlencoreXstrata may argue should it ever put the transaction before Government officials.

“They [GlencoreXstrata] could offer South African shareholders in Anglo paper instead of cash which would have been the case if GlencoreXstrata had only been listed offshore,’ said Pleming.

Were this to be the case, Glasenberg would see GlencoreXstrata succeeding where Xstrata under its former CEO, Mick Davis, failed. His merger of equals with Anglo Ameican was foiled after SA shareholders asked for cash at a premium. “At least GlencoreXstrata would have that option,’ Pleming added.

A bid for Anglo is popular speculation, especially during the heat of the commodity market bull run, but it has less credibility these days. Glencore has already bought Xstrata with its large South African coal footprint which would make a combination with Anglo less palatable from a competition point of view.

“It’s not a foregone conclusion,’ said Henk Groenewald, an analyst for Coronation Asset Managers. “And there’s other assets of Anglo American Glasenberg wouldn’t want,’ he adds. More likely, Johannesburg provides GlencoreXstrata with an eager market.

“There’s a large amount of capital in South Africa, and it’s a market that knows mining which you can’t say so much about New York and even London, where mining is only a small part of the overall market,’ he says.